Private subsidised flat pilot scheme needs refinement to attract developers' interest

HONG KONG, JULY 13, 2023 – The Private Subsidised Flat (PSF) Pilot Scheme needs to be refined to attract developers' interest under the current weakening market sentiment, according to JLL's latest Residential Market Monitor released today.

The Pilot Scheme is a step in the right direction for boosting the housing supply, but more communication with the real estate sector and fine-tuning are necessary to fully realise its goals as there are a number of potential concerns that need to be addressed.

Joseph Tsang, Chairman of JLL in Hong Kong, said: "Developers essentially make a bet on the future home price direction when investing in property development projects, but the payoff under the scheme is asymmetric. The Pilot Scheme implies a 35% reduction in potential home price gains, as private subsidised sale flat (PSSF) prices are set at 65% of the market value. Meanwhile, developers fully absorb the downside of any home price declines, as the government will not buy back unsold units, and developers may even have to launch at prices below the breakeven point."

Another concern is the uncertainty in pricing due to eligibility criteria and buyer selection. The achievable prices of PSSFs are further limited by the affordability of eligible buyers, determined by the prevailing Home Ownership Scheme (HOS). Eligible buyers will likely need to pass stress tests for mortgage applications, and unlikely to obtain a 95% LTV ratio as applicants in the HOS. In 2023, the government tightened the monthly income eligibility threshold for HOS from HKD 33,000 to HKD 31,000. Any adverse change in HOS application requirements could reduce the size of the eligible buyer group and achievable prices of PSSFs, making it challenging for developers to find a profitable price point and potentially limiting their interest in the scheme.

Norry Lee, Senior Director of Projects Strategy and Consultancy Department at JLL in Hong Kong, said: "The scheme also lacks flexibility in design and sales arrangements. The rigid flat size and number of requirements may not suit the targeted market segment for certain locations. Additionally, selling all PSSFs in one batch within one month after the Secretary for Housing's notification will restrict developers' ability to launch projects at favourable times, potentially leading to lower sell-through rates."

External factors surrounding the property market could also worsen developers' appetite. The current economic climate, characterised by heightened interest rates, rising construction costs, and falling home prices, make residential property development less attractive overall. While developers aim to meet government standards and provide quality living spaces, the development costs could strain their budgets for land premiums to a point below the government's discounted reserve level, slowing the housing supply.

Cathie Chung, Senior Director of Research at JLL in Hong Kong, said: "More collaboration between developers and the government will be required to enhance the scheme's effectiveness. This could involve revisiting eligibility criteria, mortgage arrangements, and the price cap, as well as sharing more data about eligible buyers to provide developers with greater certainty. By aligning the interests of stakeholders, the scheme could become a powerful tool for addressing the chronic housing shortage problem through further refinement."